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PowerShares Launches Financial ETFs

Invesco PowerShares launched four new financial-industry ETFs
today based on the same KBW indexes State Street stopped using on a
group of similar funds only a week ago.

PowerShares is framing the index kerfuffle with SSgA as
something of a coup, trumpeting in a press release the fact that it
won exclusive licensing rights to the benchmarks. Highlighting the
heated competition with SSgA, PowerShares said in a separate press
release that itâs waiving the new fundsâ 0.35 percent expense
ratio until Feb. 1, 2012.

âWe didnât do it to try to make things free,â Taylor Ames,
manager of the Invesco PowerShares Product Strategy ' Research
Group, said in a telephone interview. âThe main idea behind it is
to ease that transition and to try to make it as simple as possible
for people who wish to maintain exposure to KBW indexes, but
certainly waiving the fee will play out well in the minds of some
investors.â

The new PowerShares funds and their tickers are:

PowerShares KBW Bank Portfolio (NYSEArca:KBWB)

PowerShares KBW Capital Markets Index (NYSEArca:KBWC)

PowerShares KBW Insurance Portfolio (NYSEArca:KBWI)

PowerShares KBW Regional Banking Portfolio
(NYSEArca:KBWR)

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The funds target various pockets of one of the hardest-hit
sectors of the U.S. economy since the market collapse in 2008-2009.
Now with the uncertainty surrounding the eurozoneâs sovereign
debt crisis, thereâs renewed concern about the overall direction
of the U.S. economy. That said, the financial sectorâs recovery
will no doubt be a crucial part of the broader recovery, which
means investing in it could result in a big payoff some day. The
question is when.

For its part, SSgA made a preemptive publicity strike last week,
dropping the KBW indexes PowerShares is using on its new funds and
re-branding a family of five similar funds using S'P indexes.
Industry sources said PowerShares was contemplating filing a
lawsuit to block SSgA from reintroducing the SSgA funds before the
PowerShares launch. Officials at both companies declined to comment
on any potential legal wrangling over the funds and their
indexes.

Those SSgA funds include the $1.19 billion SPDR S'P Bank ETF
(NYSEArca:KBE) and also the SPDR S'P Regional Banking ETF
(NYSEArca:KRE), a $47 million fund that also happens to be one of
the most heavily shorted ETFs on the market.

SSgA framed the index change as a move to adopt more diversified
indexes with more holdings. It also maintained that the move that
would consolidate indexes of its popular sector funds within S'P.
However, some industry sources said SSgA was keen on lowering the
licensing fees it was paying KBW. Such fees are often calculated as
a percentage of assets under management, meaning the bigger the
fund, the bigger the licensing fees.

SSgA officials declined to comment on financial aspects of its
indexing agreements with either S'P or KBW.

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The Indexes

While both SSgA and PowerShares apparently were part of the
bidding process for the KBW indexes, an official at KBW said the
attractiveness of PowerSharesâ bid was part of the reason KBW
went with PowerShares.

âWe decided to consolidate our ETF providers under one roof,
and felt that Invesco PowerShares had the best global platform to
support our indexes,â Frederick Cannon, director of research at
KBW, said in a telephone interview. Cannon added that another
reason behind the decision is that KBW and PowerShares already have
agreements in place for other ETFs.

Cannon also argued that KBW indexes are more rigorous in
establishing categories than the S'P Indexes. For example, he said
that within the KBW Bank Index, larger banks are more heavily
weighted than smaller institutions.

Further, the KBW Bank Portfolio index of 24 banks includes only
heavyweights such as J.P. Morgan Chase, which has a market cap of
$136 billion.

In contrast, the S'P Banks Select Industry Index includes
smaller banks, such as the $2 billion market-capped Puerto Rican
bank, Banco Popular, which wouldnât come close to making it into
KBWâs index.

âWe believe this model more closely mirrors what investors
consider when they think of the market-cap universe
ofÂ large-cap banks,â said Cannon. âIn contrast, the
S'P-based model equally weights all of its constituents, so you
have Banco Popular in Puerto Rico equally weighted with JP
Morgan.â

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